The coverage ratio of UK defined benefit schemes would have deteriorated in October from 85% to 83% from the previous month if it were not for new actuarial assumptions the Pension Protection Fund (PPF) introduced this month in calculating scheme liabilities. Across the sample of schemes there was a 1.6% decrease in assets on average due to a fall in UK and global equities. At the same time, lower gilt yields led to an increase in liabilities of .5%.

New actuarial assumptions, however, paint a significantly improved picture with the average coverage ratio (assets divided by liabilities) of the 7,378 defined benefit schemes at 89%, representing a sharp jump over the previous month. The Board of the Pension Protection Fund is responsible for determining the assumptions used for liability valuations. In light of recent developments in the buy-out market, the Board decided to update its assumptions effective October 31 so that yields used to discount future payments are increased by either 1bp or 3bps depending on the type of liability that is being discounted. The result is a 7% reduction in liabilities, notes a PPF actuary, even as market rates declined during the month.

Using the new assumptions, the number of schemes in deficit in October stood at 5,867 compared to 6,174 in September, representing 79.5% of the DB schemes in the PPF universe. Under the old assumptions would have moved 98 more schemes into deficit. The number of schemes in surplus was also higher in October than would have otherwise been the case. There are now 1,511 schemes in surplus (20.5%) compared to 1,106 (15%) if the assumptions had remained unchanged.

A number of rules of thumb pertain to the impact of changes in asset prices and liabilities. A 7.5% increase in equity markets boosts assets by 4% while a 3bp increase in gilt yields reduces scheme assets by 1%. At the same time, a 0.3% rise in gilt yields reduces scheme liabilities by 6%.

V.B.